Air Lease Corporation
Drew Szilagyi
Qiang (Cindy) Fu
Vedvati (Vedu) Shrotre
Vishal Shah
April 9, 2015
Agenda
Introduction
Macroeconomic Overview
Industry Overview
Business Overview
Financial Analysis
Financial Projection
Valuation
Recommendation
Current Performance

Air Lease Corporation (Ticker: AL, NYSE)

Incorporated in Delaware

Purchased: 400 shares @ 22.32 on Dec 12, 2012

Stock Price: $38.51

Position: 9.2% of all stocks, 3.7% of portfolio

Return: 72.54%

Market Cap: 3.9B

P/E (ttm): 16.05

EPS (ttm): 2.40

ZIXI
4.72%
ABBV
14.04%
WBA
15.70%
ABT
11.13%
UNP
12.91%
AEO
15.49%
NHC
3.79%
Beta: 1.30
JKHY
8.25%
COF
4.79%
AL, 9.19%
Source: Yahoo Finance, AL 2014 10-K
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
3
Introduction

Business Model:
Sell aircrafts
to third
parties
Purchase new
commercial
aircrafts from
aircraft
manufactures
Lease to
airlines
Fleet
Management
Services
Source: AL 2014 10-K , Page4
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
4
Macroeconomics

U.S. carrier passenger growth over the next 20 year forecasted to be 2.0% per
year

GDP is forecast to rise 3.2 percent over the next 20 years, which will drive
passenger traffic to grow 5.0 percent annually

Stably increasing per capita disposable income (United States)
GDP (current US$ trillion)
18
16
14
12
10
8
6
4
2
0
Source: FAA https://www.faa.gov/about/office_org/headquarters_offices/apl/aviation_forecasts/aerospace_forecasts/2015-2035/media/Forecast_Highlights.pdf;
Boeing http://www.boeing.com/commercial/market/long-term-market/ IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=33
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
5
Macroeconomics


As Fed is committed to helping the American economy get back on its feet, yields
are expected to stay low/ slightly higher than today through the outlook period
Domestic trips demand is increasing through the outlook period
Source: IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=97
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
6
Industry Overview

Key Divers for the Industry


Oil and natural gas prices: forecasted to increase over the next five years
to 2020
Interest Rate
Source: IBISWorld http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=112568
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
7
Industry Overview

One in three airplanes leased, expected to rise to one in two

Profit margin of 28.0% in 2014

Forecasted annual revenue growth of 3.3%

Passenger airlines accounting for 91% of
revenue in the industry in 2014
Source: IBISWorld http://clients1.ibisworld.com/reports/us/iexpert/default.aspx?entid=4801
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
8
Regulations



FAA (Federal Aviation Administration)

Requires aircraft lessors to register all US owned or registered aircraft with
the agency

Aircrafts under direct control of lessors need to obtain a “Certificate of
Airworthiness” or a ferry flight permit for the purpose of maintenance and
storage
Department of Commerce and Department of Treasury

Restricts the operation of US made aircrafts in certain countries

May also restrict industry operator's ability to do business with specific
entities
Federal, state and local environmental health and safety regulations

Relate to the discharge of materials into the air, water or ground and the
health and the safety of employees
Source: IBISWorld http://clients1.ibisworld.com/reports/us/industry/operatingconditions.aspx?entid=4801#RAP
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
9
Supply Chain
Suppliers
Customers
200 airlines across 70
countries in Asia, the
Pacific Rim, Latin
America, the Middle
East and Eastern
Europe
The Boeing Company
Airbus S.A.S
ATR
Confirmed purchases:
1. 118 aircrafts from Airbus
2. 27 aircrafts from Boeing
3. 7 aircrafts from ATR
Financed through
unsecured debt
364 aircraft on order from
all three through 2023
Source: AL 2014 10-K, page 4
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
10
Revenue Source

By Service Line

2014 Revenue by Geographic Region
3%
6%
Asia
5%
Europe
11%
41%
Central America, South
America and Mexico
The Middle East and Africa
Pacific, Australia, New
Zealand
U.S. and Canada
34%
Source: U.S. Food and Drug Administration; IBISWorld, http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=488#KED
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
11
Management Overview


Steven F. Udvar-Házy

Chairman and Chief Executive Officer since 2010

Founder of Air Lease Corporation
Executive Compensation

Annual cash incentive
Performance Measures
Overall Revenue
Pre-Tax Operating Margin
Pre-Tax Return on Equity
Dollar Value of Aircraft Added to our Fleet
Strategic Objectives

Component
Weighting
20 %
20 %
20 %
20 %
20 %

Long-term equity incentive awards

A mix of 50% RSUs that vest based on attainment of book
value goals and 50% RSUs that vest based on attainment of
total stockholder return goals
65 employees by the end of 2014
Source: Air Lease 2015 Proxy Statement, page 26-27
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
12
Key characteristics
Source components separately for new aircrafts
Enters lease agreement 18-36 months in advance of
delivery
Own aircrafts only for 1st third of its life
WAL of aircraft fleet is 3.5 years
WAL of remaining operating lease term is 7.3 years
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
13
Operational Characteristics
High
concentr
ation in
narrowbody
Intro
Macro
Industry
Business
Financial
Analysis
95%
international
revenue
Financial
Projection
Fully
leased for
current
year
Valuation
Recomm
endation
14
Risk Factors
Lessee
defaults
Finding a
good price for
selling old
aircrafts
High
concentration in
a specific country
in a geographic
region
Aircraft
Models
Concentration
Interest
Rates
Source: AL 2014 10-K, page 14-33
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm 15
endation
Stock Performance Comparison vs. Competitors
& S&P 500
Source: Yahoo Finance
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm 16
endation
Porter’s Five Forces
Moderate
• Large Customer Size
High
• Large Initial Investment
• High Maintenance Costs
• Regulations from Federal
Aviation Administration
Bargaining Power of
Customers
5
4
Moderate
• Fierce Competition
3
2
Barriers to Entry
Rivalry
1
0
High
• High Concentration
amongst Suppliers
Bargaining Power of
Suppliers
Threat of Substitutes
Low
• Few substitutes in
the Market
Source: Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
17
SWOT ANALYSIS
Strengths
-Strengths
Geographically diversified
customers
- Highly diversified product portfolio
- High number of ANDA
approvals
Opportunities
- Recovering economy drives
up demand for air travel
- Increasing interest rate
makes leasing more
attractive
Intro
Macro
Industry
Business
Weaknesses
- Thin supplier base
- Volatility due to oil price
Threats
- Possible increase in interest
rate makes borrowing more
expensive
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
18
Financial Analysis - Ratios
• Company has transitioned from it’s growth stage and now has a declining revenues growth
with steady profit margin
Net Income Growth
Revenue Growth
250%
600%
500%
200%
400%
150%
300%
100%
200%
100%
50%
0%
0%
2011
2012
2013
Profitability
2014
2011
2012
2013
2014
2010
2011
2012
2013
2014
-89.2%
15.8%
20.1%
22.2%
24.4%
Return on asset
0.0%
3.7%
5.1%
5.2%
5.3%
Return on equity
-4.2%
3.1%
5.9%
7.8%
9.7%
Business
Financial
Analysis
Financial
Projection
Net profit margin
Source: 2014 10-K, Team analysis
Intro
Macro
Industry
Valuation
Recomm 19
endation
Financial Analysis - Ratios
Dupont analysis
Return on Equity =
2010
-4.2%
2011
3.1%
2012
5.9%
2013
7.8%
2014
9.7%
Tax burden (NI/Pretax Income)
85%
64%
65%
65%
65%
x Interest burden (Pretax
income/EBIT)
664%
59%
58%
60%
64%
x Operating margin(EBIT/Sales)
-16%
42%
54%
57%
59%
x Asset turnover (Sales/asset)
0.03
0.09
0.10
0.10
0.10
x Leverage (Asset/Equity)
1.86
2.19
2.78
3.44
3.80
2011
2012
2013
2014
Greenblatt ratio 1 (EBIT/Tangible Assets)
3.1%
5.4%
5.9%
6.5%
Greenblatt ratio 2 (EBIT/EV)
3.0%
5.6%
5.5%
6.2%
Financial
Analysis
Financial
Projection
Greenblatt Ratios
Source: 2014 10-K, Team analysis
Intro
Macro
Industry
Business
Valuation
Recomm
endation
20
Financial Analysis - Capital Structure




Intro
71% debt financed
68% of debt is Unsecured Senior Notes, used to finance aircraft
purchases
3.64% composite cost of funds, 4.00% average fixed debt cost
All aircrafts are leased as Operating leases
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
21
Financial Analysis - Ratios
Solvency Ratios
Financial leverage
2010
2011
2012
2013
2014
Long-term debt to asset
40.1%
50.4%
59.6%
62.7%
62.3%
Interest Coverage Ratio
-0.01
1.92
1.89
1.99
2.16
Solvency Ratio
-0.04
0.06
0.08
0.08
0.09
• High and steady debt levels coupled with improving interest coverage ratio
Activity Ratios
Activity
2010
2011
2012
2013
2014
Total asset turnover
0.03
0.09
0.10
0.10
0.10
Fixed asset turnover
0.04
0.11
0.12
0.12
0.12
Business
Financial
Analysis
Financial
Projection
• Steady turnover ratios
Source: 2014 10-K, Team analysis
Intro
Macro
Industry
Valuation
Recomm
endation
22
Financial Projections – Revenue Assumptions
Fleet Size Assumptions
2015
2016
2017
2018
2019
40
32
27
33
49
2
4
4
4
40
34
31
37
53
Current Lease Commitments
100%
78%
56%
36%
10%
Expected % of Fleet leased
100%
95%
95%
95%
95%
Fleet Leased
40
33
30
36
51
Less: Termination of lease contracts
5
12
15
7
32
248
269
284
313
332
16.4%
8.5%
5.6%
10.2%
6.1%
2016
2017
2018
2019
5,295
5,401
5,509
2.0%
2.0%
2.0%
Incremental Fleet Purchases
Additional Purchase agreements
not entered into yet
Total Incremental Fleet purchases
Fleet Size
Growth
Revenue Growth Assumptions
2015
Revenue from rental of flight equipment / Plane
5,089
% Growth
Revenue from rental of flight equipment
(thousands)
% Growth
5,191
1.0%
2.0%
1,262,166
1,396,424
27%
11%
1,503,777 1,690,478 1,828,957
8%
12%
8%
Source: 2014 10-K, Team analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
23
Financial Projections – Balance Sheet Assumptions
Capital Expenditure
2015
Purchase Cost per plane
2016
59,546
Flight equipment subject to operating leases
Add: Additions to fleet (already contracted)
Financing the Capital Expenditure
72,352
2018
70,635
88,466
2019
81,604
9,832,421 12,214,278 14,674,259 16,863,935 20,137,166
2,381,857
2,315,276
1,907,137
2,919,369
3,998,600
-
144,705
282,539
353,863
326,416
Add: Additions to fleet (assumption)
Total Flight equipment subject to operating lease
2017
12,214,278 14,674,259 16,863,935 20,137,166 24,462,183
2015
2016
2017
2018
2019
Debt Financing
6,714,362
8,305,709
9,978,496 11,467,476 13,693,273
Add: Debt Issued
1,762,905
2,543,469
2,904,399
Less: Debt Obligation
(171,558)
(870,682) (1,415,419) (1,542,706) (1,173,489)
Debt outstanding at year end
% of Fleet size
8,305,709
68%
9,978,496 11,467,476 13,693,273 17,123,528
68%
68%
68%
70%
3,768,504
4,603,744
Team Analysis
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
24
Financial Projections – Income Statement
Assumptions
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
25
Valuation – Residual Income Method
Valuation
Residual Income Model
2014
Beginning Common Stock Equity
$
2015
2,523,434 $
Plus: Net Income
2,772,062 $
2016
3,117,723 $
2017
2018
3,481,422 $
3,851,691 $
2019 Terminal
4,263,466
255,998
350,129
370,729
378,221
421,652
425,175
944
-
-
-
-
-
Plus: Stock-Based Comp
16,048
13,039
11,506
10,960
11,206
12,242
Less: Common Dividends
(13,284)
(17,506)
(18,536)
(18,911)
(21,083)
(21,259)
2,772,062 $
3,117,723 $
3,481,422 $
3,851,691 $
4,263,466 $
Plus: Stock Issuances:
Ending Common Stock Equity
$
4,679,625
Net Income
350,129
370,729
378,221
421,652
425,175
Less : Equity Charge
257,598
289,719
323,516
357,924
396,188
-
-
-
-
-
92,532
81,010
54,705
63,728
28,987
319,733
82,771 $
64,821 $
39,155 $
40,802 $
16,601 $
183,114
Plus: Depreciation
-
Modified Residual Income
PV of Residual Income
$
Cost of Equity
9.3%
Business Risk Premium
2.5%
Discount Rate
Terminal Growth Rate
2.5%
Current Value from Common Share Equity
Terminal Residual Income After 2019
Present Value of Equity
$
244,149
Equity Risk premium
5.00%
183,114
Adjusted Beta
Industry
1.30
Cost of equity CAPM
110,193
$
Macro
2.80%
3,199,325
Diluted Common Share Outstanding
Implied Share Price
Risk Free rate
2,772,062
Residual Income from Yr 2015-2019
Intro
Cost of Equity
11.8%
9.29%
29.03
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
26
Valuation - Comparable Analysis
Comparable Companies Analysis
($ in thousands except per share data)
Current
Company
Ticker
Enterprise Value /
Price /
Market Cap/
Share
LTM
LTM
LTM
Price
Sales
EBIT
EPS
BV
EBT
16.0x
1.4x
9.9x
Air Lease Corp
AL
$37.99
9.8x
16.8x
AerCap Holdings
AER
$42.34
10.6x
20.3x
9.9x
1.2x
8.5x
FLY Leasing Limited
FLY
$15.73
8.2x
18.1x
11.2x
0.8x
14.7x
Aircastle LTD
AYR
$19.70
6.8x
12.0x
17.9x
1.1x
8.1x
AVOL
$21.50
10.2x
19.7x
18.5x
1.2x
16.1x
Mean
9.0x
17.5x
14.4x
1.1x
11.9x
Median
9.2x
18.9x
14.6x
1.2x
11.6x
High
10.6x
20.3x
18.5x
1.2x
16.1x
Low
6.8x
12.0x
9.9x
0.8x
8.1x
Avolon Holdings Ltd
Comparable Companies Valuation
Implied Multiples
Metric
Statistics
Implied Share Price
Low
Median
High
Low
Median
High
Weights
6.8x
9.2x
10.6x
$6.46
$29.34
$42.69
15%
P/BV
0.8x
1.2x
1.2x
$21.71
$31.21
$32.56
20%
P/E
9.9x
14.6x
18.5x
$23.56
$34.63
$44.03
15%
16.1x
$29.02
$41.56
$57.68
50%
EV/LTM Sales
$1,050,493
M/EBT
8.1x
Average Valuation
Intro
11.6x
$36.62
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
27
Technical Analysis
Source: Bloomberg
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
28
Valuation Summary
Graham Valuation
EPS
Growth
Value
2.38
2.50
$ 32.13
Valuation Summary
Residual Income Model
Benjamin Graham
Comparable Method
Average Price
Current Market price
Intro
Macro
Industry
Business
Financial
Analysis
$
$
$
$
$
Financial
Projection
29.03
32.13
36.62
32.59
38.51
Valuation
Recomm
endation
29
Recommendation
Plans to increase
fleet size coupled
with ability to
convert purchases
into leases
Approaching
maturity
ROE almost equals
Cost of Equity
Anticipated rise in
interest rates is a
double-edged sword
Intro
Macro
Industry
Business
Financial
Analysis
Financial
Projection
Valuation
Recomm
endation
30